April 26, 2017 - 10-Q: Quarterly report [Sections 13 or 15(d)]

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-36722

TRIUMPH BANCORP, INC.

(Exact name of registrant as specified in its charter)

Texas

20-0477066

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

12700 Park Central Drive, Suite 1700

Dallas, Texas 75251

(Address of principal executive offices)

(214) 365-6900

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐

Emerging growth company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock — $0.01 par value, 18,105,038 shares, as of April 19, 2017

TRIUMPH BANCORP, INC.

FORM 10-Q

March 31, 2017

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets	2
	Consolidated Statements of Income	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Changes in Stockholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Condensed Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risks	64
Item 4.	Controls and Procedures	66

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	66
Item 1A.	Risk Factors	66
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
Item 3.	Defaults Upon Senior Securities	66
Item 4.	Mine Safety Disclosures	66
Item 5.	Other Information	66
Item 6.	Exhibits	67

PART I – FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

March 31, 2017 and December 31, 2016

(Dollar amounts in thousands, except per share amounts)

	March 31,			December 31,
	2017			2016
	(Unaudited)
ASSETS
Cash and due from banks	$	32,252		$	38,613
Interest bearing deposits with other banks		93,832			75,901
Total cash and cash equivalents		126,084			114,514
Securities - available for sale		254,452			275,029
Securities - held to maturity, fair value of $30,072 and $30,821, respectively		28,882			29,352
Loans, net of allowance for loan and lease losses of $19,093 and $15,405, respectively		2,016,143			2,012,219
Federal Home Loan Bank stock, at cost		7,167			8,430
Premises and equipment, net		44,630			45,460
Other real estate owned, net		11,638			6,077
Goodwill		28,810			28,810
Intangible assets, net		15,423			17,721
Bank-owned life insurance		36,679			36,509
Deferred tax assets, net		15,678			18,825
Other assets		49,772			48,121
Total assets	$	2,635,358		$	2,641,067
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest bearing	$	382,009		$	363,351
Interest bearing		1,642,279			1,652,434
Total deposits		2,024,288			2,015,785
Customer repurchase agreements		10,468			10,490
Federal Home Loan Bank advances		200,000			230,000
Subordinated notes		48,757			48,734
Junior subordinated debentures		32,840			32,740
Other liabilities		18,580			13,973
Total liabilities		2,334,933			2,351,722
Commitments and contingencies - See Note 8 and Note 9
Stockholders' equity - See Note 12
Preferred Stock		9,746			9,746
Common stock		182			182
Additional paid-in-capital		197,866			197,157
Treasury stock, at cost		(1,494	)		(1,374	)
Retained earnings		94,191			83,910
Accumulated other comprehensive income (loss)		(66	)		(276	)
Total stockholders’ equity		300,425			289,345
Total liabilities and stockholders' equity	$	2,635,358		$	2,641,067

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the Three Months Ended March 31, 2017 and 2016

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2017			2016
Interest and dividend income:
Loans, including fees	$	25,185		$	16,088
Factored receivables, including fees		9,167			7,822
Securities		1,611			765
FHLB stock		42			10
Cash deposits		327			208
Total interest income		36,332			24,893
Interest expense:
Deposits		2,869			1,993
Subordinated notes		835			—
Junior subordinated debentures		465			302
Other borrowings		344			109
Total interest expense		4,513			2,404
Net interest income		31,819			22,489
Provision for loan losses		7,678			(511	)
Net interest income after provision for loan losses		24,141			23,000
Noninterest income:
Service charges on deposits		980			659
Card income		827			546
Net OREO gains (losses) and valuation adjustments		11			(11	)
Net gains (losses) on sale of securities		—			5
Net gains on sale of loans		—			12
Fee income		583			534
Asset management fees		1,717			1,629
Gain on sale of subsidiary		20,860			—
Other		2,307			1,607
Total noninterest income		27,285			4,981
Noninterest expense:
Salaries and employee benefits		21,958			12,252
Occupancy, furniture and equipment		2,359			1,493
FDIC insurance and other regulatory assessments		226			224
Professional fees		1,968			1,073
Amortization of intangible assets		1,111			977
Advertising and promotion		938			519
Communications and technology		2,174			1,432
Other		4,103			2,108
Total noninterest expense		34,837			20,078
Net income before income tax		16,589			7,903
Income tax expense		6,116			2,897
Net income		10,473			5,006
Dividends on preferred stock		(192	)		(194	)
Net income available to common stockholders	$	10,281		$	4,812
Earnings per common share
Basic	$	0.57		$	0.27
Diluted	$	0.55		$	0.27

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the Three Months Ended March 31, 2017 and 2016

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2017			2016
Net income	$	10,473		$	5,006
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during the period		335			1,456
Reclassification of amount realized through sale of securities		—			(5	)
Tax effect		(125	)		(540	)
Total other comprehensive income (loss)		210			911
Comprehensive income	$	10,683		$	5,917

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2017 and 2016

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

	Preferred Stock		Common Stock							Treasury Stock								Accumulated
	Liquidation							Additional										Other			Total
	Preference		Shares			Par		Paid-in-		Shares					Retained			Comprehensive			Stockholders'
	Amount		Outstanding			Amount		Capital		Outstanding		Cost			Earnings			Income (Loss)			Equity
Balance, January 1, 2016	$	9,746		18,018,200		$	181	$	194,297		34,523	$	(560	)	$	64,097		$	277		$	268,038
Stock based compensation		—		—			—		353		—		—			—			—			353
Forfeiture of restricted stock awards		—		(2,777	)		—		37		2,777		(37	)		—			—			—
Series A Preferred dividends		—		—			—		—		—		—			(91	)		—			(91	)
Series B Preferred dividends		—		—			—		—		—		—			(103	)		—			(103	)
Net income		—		—			—		—		—		—			5,006			—			5,006
Other comprehensive income		—		—			—		—		—		—			—			911			911
Balance, March 31, 2016	$	9,746		18,015,423		$	181	$	194,687		37,300	$	(597	)	$	68,909		$	1,188		$	274,114

Balance, January 1, 2017	$	9,746		18,078,247		$	182	$	197,157		76,118	$	(1,374	)	$	83,910		$	(276	)	$	289,345
Issuance of restricted stock awards		—		5,174			—		—		—		—			—			—			—
Stock based compensation		—		—			—		702		—		—			—			—			702
Forfeiture of restricted stock awards		—		(251	)		—		7		251		(7	)		—			—			—
Purchase of treasury stock		—		(4,401	)		—		—		4,401		(113	)		—			—			(113	)
Series A Preferred dividends		—		—			—		—		—		—			(90	)		—			(90	)
Series B Preferred dividends		—		—			—		—		—		—			(102	)		—			(102	)
Net income		—		—			—		—		—		—			10,473			—			10,473
Other comprehensive income		—		—			—		—		—		—			—			210			210
Balance, March 31, 2017	$	9,746		18,078,769		$	182	$	197,866		80,770	$	(1,494	)	$	94,191		$	(66	)	$	300,425

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2017 and 2016

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2017			2016
Cash flows from operating activities:
Net income	$	10,473		$	5,006
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		958			572
Net accretion on loans and deposits		(1,080	)		(1,190	)
Amortization of subordinated notes issuance costs		23			—
Amortization of junior subordinated debentures		100			67
Net amortization on securities		644			176
Amortization of intangible assets		1,111			977
Deferred taxes		3,023			(133	)
Provision for loan losses		7,678			(511	)
Stock based compensation		702			353
Net (gain) loss on loans transferred to loans held for sale		46			76
Net gains on sale of loans		—			(12	)
Net OREO (gains) losses and valuation adjustments		(11	)		11
Gain on sale of subsidiary		(20,860	)		—
Income from CLO warehouse investments		(964	)		(984	)
(Increase) decrease in other assets		509			3,366
Increase (decrease) in other liabilities		1,262			(1,428	)
Net cash provided by (used in) operating activities		3,614			6,346
Cash flows from investing activities:
Purchases of securities available for sale		(4,817	)		(3,264	)
Proceeds from sales of securities available for sale		—			4,345
Proceeds from maturities, calls, and pay downs of securities available for sale		24,706			1,829
Purchases of securities held to maturity		—			(25,775	)
Proceeds from maturities, calls, and pay downs of securities held to maturity		4,109			—
Purchases of loans (shared national credits)		—			(995	)
Proceeds from sale of loans		1,919			—
Net change in loans		(7,947	)		45,177
Purchases of premises and equipment, net		(405	)		(494	)
Net proceeds from sale of OREO		683			59
(Purchases) redemptions of FHLB stock, net		1,263			(416	)
Proceeds from sale of subsidiary, net		10,269			—
Net cash provided by (used in) investing activities		29,780			20,466
Cash flows from financing activities:
Net increase in deposits		8,503			11,496
Increase (decrease) in customer repurchase agreements		(22	)		324
Increase (decrease) in Federal Home Loan Bank advances		(30,000	)		(20,000	)
Purchase of treasury stock		(113	)		—
Dividends on preferred stock		(192	)		(194	)
Net cash provided by (used in) financing activities		(21,824	)		(8,374	)
Net increase (decrease) in cash and cash equivalents		11,570			18,438
Cash and cash equivalents at beginning of period		114,514			105,277
Cash and cash equivalents at end of period	$	126,084		$	123,715

See accompanying condensed notes to consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2017 and 2016

(Dollar amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended March 31,
	2017			2016
Supplemental cash flow information:
Interest paid	$	5,269		$	2,348
Income taxes paid (refunds received), net	$	(917	)	$	1,123
Supplemental noncash disclosures:
Loans transferred to OREO	$	5,960		$	156
Premises transferred to OREO	$	273		$	2,215
Loans transferred to loans held for sale	$	1,919		$	2,805
Securities held to maturity purchased, not settled	$	3,260		$	—
Consideration received from sale of subsidiary	$	12,123		$	—

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Triumph Bancorp, Inc. (collectively with its subsidiaries, “Triumph”, or the “Company” as applicable) is a financial holding company headquartered in Dallas, Texas. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries Triumph Capital Advisors, LLC (“TCA”), Triumph CRA Holdings, LLC (“TCRA”), TBK Bank, SSB (“TBK Bank”), TBK Bank’s wholly owned subsidiary Advance Business Capital LLC, which currently operates under the d/b/a of Triumph Business Capital (“TBC”), and TBK Bank’s wholly owned subsidiary Triumph Insurance Group, Inc. (“TIG”).

TBK Bank also does business under the following names: (i) Triumph Community Bank (“TCB”) with respect to its community banking business in certain markets; (ii) Triumph Commercial Finance (“TCF”) with respect to its asset based lending, equipment lending and general factoring commercial finance products; (iii) Triumph Healthcare Finance (“THF”) with respect to its healthcare asset based lending business; and (iv) Triumph Premium Finance (“TPF”) with respect to its insurance premium financing business.

On March 31, 2017 the Company sold its membership interests in TCA. See Note 2 – Business Combinations and Divestitures for details of the TCA sale and its impact on our consolidated financial statements.

Principles of Consolidation and Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States Generally Accepted Accounting Principles (“GAAP”) for interim financial information and in accordance with guidance provided by the Securities and Exchange Commission. Accordingly, the condensed financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all normal and recurring adjustments considered necessary for a fair presentation. Transactions between the subsidiaries have been eliminated. These condensed consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

The Company has four reportable segments consisting of Banking, Factoring, Asset Management, and Corporate. The Company’s Chief Executive Officer uses segment results to make operating and strategic decisions. On March 31, 2017 the Company sold its membership interests in TCA, which comprised the entirety of the Asset Management segment’s operations. See Note 2 – Business Combinations and Divestitures for details of the TCA sale and its impact on our consolidated financial statements.

Adoption of New Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). The FASB issued this ASU to improve the accounting for share-based payments. ASU 2016-09 simplifies several aspects of the accounting for share-based payment award transactions, including: the presentation of income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and calculation of diluted earnings per share. The new standard was effective for the Company on January 1, 2017. Adoption of ASU 2016-09 did not have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities” (“ASU 2017-08”). These amendments shorten the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. As permitted by the amendment, the Company elected to early adopt the provisions of this ASU as of January 1, 2017. Adoption of ASU 2017-08 did not have a material impact on the Company’s consolidated financial statements.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Newly Issued, But Not Yet Effective Accounting Standards

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in GAAP when it becomes effective. The new standard is effective for the Company on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is evaluating the full effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures, however, adoption of the ASU is not expected to have a significant impact. The Company’s primary sources of revenues are derived from interest and dividends earned on loans, investment securities, and other financial instruments that are not within the scope of ASU 2014-09.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 will be effective for the Company on January 1, 2018 and is not expected to have a significant impact on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). The FASB issued this ASU to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet by lessees for those leases classified as operating leases under current U.S. GAAP and disclosing key information about leasing arrangements. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. Early application of this ASU is permitted for all entities. Adoption of ASU 2016-02 is not expected to have a material impact on the Company’s consolidated financial statements. The Company leases certain properties and equipment under operating leases that will result in the recognition of lease assets and lease liabilities on the Company’s balance sheet under the ASU, however, the majority of the Company’s properties and equipment are owned, not leased.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to form their credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, although the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 31, 2019, and interim periods within those years for public business entities that are SEC filers. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the impact that the adoption of this standard will have on the financial condition and results of operations of the Company.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 2 – Business combinations AND DIVESTITURES

Triumph Capital Advisors, LLC

On March 31, 2017, the Company sold its wholly owned asset management subsidiary, Triumph Capital Advisors, LLC, to an unrelated third party. The transaction was completed to enhance shareholder value and provide a platform for TCA to operate without the impact of regulations intended for depository institutions.

A summary of the consideration received and the gain on sale is as follows:

(Dollars in thousands)
Consideration received (fair value):
Cash	$	10,554
Loan receivable		10,500
Revenue share		1,623
Total consideration received		22,677
Carrying value of TCA membership interest		1,417
Gain on sale of subsidiary		21,260
Transaction costs		400
Gain on sale of subsidiary, net of transaction costs	$	20,860

The Company financed a portion of the consideration received with a $10,500,000 term credit facility. Terms of the floating rate credit facility provide for quarterly principal and interest payments with an interest rate floor of 5.50%, maturing on March 31, 2023. The Company received a $25,000 origination fee associated with the term credit facility that was deferred and will be accreted over the contractual life of the loan as a yield adjustment.

In addition, the Company is entitled to receive an annual earn-out payment representing 3% of TCA’s future annual gross revenue, with a total maximum earn-out amount of $2,500,000. The revenue share earn-out is considered contingent consideration which the Company elected to record as an asset at its estimated fair value of $1,623,000 on the date of sale.

The Company incurred pre-tax expenses related to the transaction, including professional fees and other direct transaction costs, totaling $400,000 which were netted against the gain on sale of subsidiary in the consolidated statements of income during the three months ended March 31, 2017.

Southern Transportation Insurance Agency

On September 1, 2016, the Company acquired Southern Transportation Insurance Agency, Ltd. in an all-cash transaction for $2,150,000. The purpose of the acquisition was to expand the Company’s product offerings for clients in the transportation industry. The Company recognized an intangible asset of $1,580,000 and goodwill of $570,000, which were allocated to the Company’s Banking segment. Goodwill resulted from expected enhanced product offerings and will be amortized for tax purposes.

ColoEast Bankshares, Inc.

On August 1, 2016, the Company acquired 100% of the outstanding common stock of ColoEast Bankshares, Inc. (“ColoEast”) and its community banking subsidiary, Colorado East Bank & Trust, in an all-cash transaction for $70,000,000. The Company also assumed $10,500,000 of ColoEast preferred stock issued in conjunction with the U.S. Government’s Treasury Asset Relief Program (“TARP Preferred Stock”). Colorado East Bank & Trust, which was merged into TBK Bank upon closing, offers personal checking, savings, CD, money market, HSA, IRA, NOW and business accounts, as well as commercial and consumer loans from 18 branches and one loan production office located throughout Colorado and far western Kansas. The acquisition expands the Company’s market into Colorado and Kansas and further diversifies the Company’s loan, customer, and deposit base.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A summary of the fair values of assets acquired, liabilities assumed, consideration transferred, and the resulting goodwill is as follows:

	Initial Values		Measurement
	Recorded at		Period			Adjusted
(Dollars in thousands)	Acquisition Date		Adjustments			Values
Assets acquired:
Cash and cash equivalents	$	57,671	$	—		$	57,671
Securities		161,693		—			161,693
Loans		460,775		—			460,775
FHLB and Federal Reserve Bank stock		550		—			550
Premises and equipment		23,940		—			23,940
Other real estate owned		3,105		(143	)		2,962
Intangible assets		7,238		—			7,238
Bank-owned life insurance		6,400		—			6,400
Deferred income taxes		4,511		(70	)		4,441
Other assets		10,022		—			10,022
		735,905		(213	)		735,692
Liabilities assumed:
Deposits		652,952		—			652,952
Junior subordinated debentures		7,728		—			7,728
Other liabilities		6,784		—			6,784
		667,464		—			667,464
Fair value of net assets acquired		68,441		(213	)		68,228
Cash paid		70,000		—			70,000
TARP Preferred Stock assumed		10,500		—			10,500
Consideration transferred		80,500		—			80,500
Goodwill	$	12,059	$	213		$	12,272

The consideration was comprised of a combination of cash and the assumption of ColoEast’s TARP Preferred Stock. The Company recognized goodwill of $12,272,000, which included measurement period adjustments related to the final valuation of other real estate owned acquired in the transaction and the finalization of income taxes associated with the transaction. Goodwill was calculated as the excess of both the consideration exchanged and liabilities assumed as compared to the fair value of identifiable net assets acquired and was allocated to the Company’s Banking segment. The goodwill in this acquisition resulted from expected synergies and expansion into the Colorado and Kansas markets. The goodwill will not be amortized for tax purposes.

The TARP Preferred Stock assumed in the acquisition was redeemed by the Company at par on August 31, 2016.

In connection with the ColoEast acquisition, the Company acquired loans both with and without evidence of credit quality deterioration since origination. The acquired loans were initially recorded at fair value with no carryover of any allowance for loan losses. Acquired loans were segregated between those considered to be purchased credit impaired (“PCI”) loans and those without credit impairment at acquisition. The following table presents details on acquired loans at the acquisition date:

	Loans, Excluding		PCI		Total
(Dollars in thousands)	PCI Loans		Loans		Loans
Commercial real estate	$	86,569	$	10,907	$	97,476
Construction, land development, land		58,718		2,933		61,651
1-4 family residential properties		36,412		91		36,503
Farmland		100,977		233		101,210
Commercial		151,605		5,129		156,734
Factored receivables		694		—		694
Consumer		6,507		—		6,507
	$	441,482	$	19,293	$	460,775

The operations of ColoEast are included in the Company’s operating results beginning August 1, 2016.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Expenses related to the acquisition, including professional fees and other transaction costs, totaling $1,618,000 were recorded in noninterest expense in the consolidated statements of income during the three months ended September 30, 2016.

NOTE 3 - SECURITIES

Securities have been classified in the financial statements as available for sale or held to maturity. The amortized cost of securities and their approximate fair values at March 31, 2017 and December 31, 2016 are as follows:

			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
March 31, 2017	Cost		Gains		Losses			Value
Available for sale securities:
U.S. Government agency obligations	$	158,212	$	565	$	(561	)	$	158,216
U.S. Treasury notes		4,820		29		—			4,849
Mortgage-backed securities, residential		23,580		417		(157	)		23,840
Asset backed securities		12,966		—		(126	)		12,840
State and municipal		25,580		11		(405	)		25,186
Corporate bonds		27,250		115		(4	)		27,361
SBA pooled securities		148		1		—			149
Mutual fund		2,000		11		—			2,011
Total available for sale securities	$	254,556	$	1,149	$	(1,253	)	$	254,452

			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gains		Losses			Value
Held to maturity securities:
CLO securities	$	28,882	$	1,284	$	(94	)	$	30,072

			Gross		Gross
(Dollars in thousands)	Amortized		Unrealized		Unrealized			Fair
December 31, 2016	Cost		Gains		Losses			Value
Available for sale securities:
U.S. Government agency obligations	$	180,945	$	640	$	(643	)	$	180,942
Mortgage-backed securities, residential		24,710		453		(173	)		24,990
Asset backed securities		13,031		30		(159	)		12,902
State and municipal		27,339		6		(708	)		26,637
Corporate bonds		27,287		106		(3	)		27,390
SBA pooled securities		156		1		—			157
Mutual fund		2,000		11		—			2,011
Total available for sale securities	$	275,468	$	1,247	$	(1,686	)	$	275,029

			Gross		Gross
	Amortized		Unrecognized		Unrecognized			Fair
	Cost		Gains		Losses			Value
Held to maturity securities:
CLO securities	$	29,352	$	1,527	$	(58	)	$	30,821

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The amortized cost and estimated fair value of securities at March 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available for Sale Securities				Held to Maturity Securities
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
Due in one year or less	$	57,965	$	57,950	$	—	$	—
Due from one year to five years		133,213		133,274		—		—
Due from five years to ten years		5,858		5,794		9,491		10,015
Due after ten years		18,826		18,594		19,391		20,057
		215,862		215,612		28,882		30,072
Mortgage-backed securities, residential		23,580		23,840		—		—
Asset backed securities		12,966		12,840		—		—
SBA pooled securities		148		149		—		—
Mutual fund		2,000		2,011		—		—
	$	254,556	$	254,452	$	28,882	$	30,072

Proceeds from sales of securities and the associated gross gains and losses for the three months ended March 31, 2017 and 2016 are as follows:

	Three Months Ended March 31,
(Dollars in thousands)	2017		2016
Proceeds	$	—	$	4,345
Gross gains	$	—	$	5
Gross losses	$	—	$	—

Securities with a carrying amount of approximately $167,322,000 and $194,571,000 at March 31, 2017 and December 31, 2016, respectively, were pledged to secure public deposits, customer repurchase agreements, and for other purposes required or permitted by law.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Information pertaining to securities with gross unrealized and unrecognized losses at March 31, 2017 and December 31, 2016, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are summarized as follows:

	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
March 31, 2017	Value		Losses			Value		Losses			Value		Losses
Available for sale securities:
U.S. Government agency obligations	$	82,730	$	(561	)	$	—	$	—		$	82,730	$	(561	)
U.S. Treasury notes		—		—			—		—			—		—
Mortgage-backed securities, residential		6,520		(157	)		—		—			6,520		(157	)
Asset backed securities		4,863		(79	)		7,977		(47	)		12,840		(126	)
State and municipal		24,119		(405	)		—		—			24,119		(405	)
Corporate bonds		371		(4	)		—		—			371		(4	)
SBA pooled securities		—		—			—		—			—		—
Mutual fund		—		—			—		—			—		—
	$	118,603	$	(1,206	)	$	7,977	$	(47	)	$	126,580	$	(1,253	)

	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
March 31, 2017	Value		Losses			Value		Losses			Value		Losses
Held to maturity securities:
CLO securities	$	6,532	$	(94	)	$	—	$	—		$	6,532	$	(94	)

	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2016	Value		Losses			Value		Losses			Value		Losses
Available for sale securities:
U.S. Government agency obligations	$	95,362	$	(643	)	$	—	$	—		$	95,362	$	(643	)
Mortgage-backed securities, residential		6,594		(173	)		—		—			6,594		(173	)
Asset backed securities		—		—			7,946		(159	)		7,946		(159	)
State and municipal		25,771		(708	)		—		—			25,771		(708	)
Corporate bonds		372		(3	)		—		—			372		(3	)
SBA pooled securities		—		—			—		—			—		—
Mutual funds		—		—			—		—			—		—
	$	128,099	$	(1,527	)	$	7,946	$	(159	)	$	136,045	$	(1,686	)

	Less than 12 Months					12 Months or More					Total
(Dollars in thousands)	Fair		Unrecognized			Fair		Unrecognized			Fair		Unrecognized
December 31, 2016	Value		Losses			Value		Losses			Value		Losses
Held to maturity securities:
CLO securities	$	3,323	$	(58	)	$	—	$	—		$	3,323	$	(58	)

Management evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At March 31, 2017, the Company had 91 securities in an unrealized loss position. Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe that any of the securities are impaired due to reasons of credit quality. Accordingly, as of March 31, 2017, management believes that the unrealized losses detailed in the previous table are temporary and no other than temporary impairment loss has been recognized in the Company’s consolidated statements of income.

NOTE 4 - LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

The following table presents the recorded investment and unpaid principal for loans at March 31, 2017 and December 31, 2016:

	March 31, 2017								December 31, 2016
	Recorded			Unpaid					Recorded			Unpaid
(Dollars in thousands)	Investment			Principal		Difference			Investment			Principal		Difference
Commercial real estate	$	498,099		$	503,659	$	(5,560	)	$	442,237		$	447,926	$	(5,689	)
Construction, land development, land		109,849			113,173		(3,324	)		109,812			113,211		(3,399	)
1-4 family residential properties		105,230			106,979		(1,749	)		104,974			106,852		(1,878	)
Farmland		136,537			137,587		(1,050	)		141,615			142,673		(1,058	)
Commercial		792,764			796,712		(3,948	)		778,643			783,349		(4,706	)
Factored receivables		242,098			243,535		(1,437	)		238,198			239,432		(1,234	)
Consumer		28,415			28,425		(10	)		29,764			29,782		(18	)
Mortgage warehouse		122,244			122,244		—			182,381			182,381		—
Total		2,035,236		$	2,052,314	$	(17,078	)		2,027,624		$	2,045,606	$	(17,982	)
Allowance for loan and lease losses		(19,093	)							(15,405	)
	$	2,016,143							$	2,012,219

The difference between the recorded investment and the unpaid principal is primarily associated with (1) premiums and discounts associated with acquisition date fair value adjustments on acquired loans (both PCI and non-PCI) totaling $14,072,000 and $15,210,000 at March 31, 2017 and December 31, 2016, respectively, and (2) net deferred origination and factoring fees totaling $3,006,000 and $2,772,000 at March 31, 2017 and December 31, 2016, respectively.

At March 31, 2017 and December 31, 2016, the Company had $23,573,000 and $23,597,000, respectively, of customer reserves associated with factored receivables. These amounts represent customer reserves held to settle any payment disputes or collection shortfalls, may be used to pay customers’ obligations to various third parties as directed by the customer, are periodically released to or withdrawn by customers, and are reported as deposits in the consolidated balance sheets.

Loans with carrying amounts of $450,654,000 and $497,573,000 at March 31, 2017 and December 31, 2016, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity.

During the three months ended March 31, 2017 and 2016, loans with carrying amounts of $1,965,000 and $2,881,000, respectively, were transferred to loans held for sale as the Company made the decision to sell the loans. These loans were subsequently sold resulting in proceeds of $1,919,000 and $2,805,000, respectively, and losses on sale of loans of $46,000 and $76,000, respectively, which were recorded as other noninterest income in the consolidated statements of income.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Allowance for Loan and Lease Losses

The activity in the allowance for loan and lease losses (“ALLL”) during the three months ended March 31, 2017 and 2016 is as follows:

(Dollars in thousands)	Beginning										Ending
Three months ended March 31, 2017	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	1,813	$	567		$	(137	)	$	—	$	2,243
Construction, land development, land		465		513			(419	)		7		566
1-4 family residential properties		253		(70	)		(28	)		5		160
Farmland		170		44			—			—		214
Commercial		8,014		5,793			(2,852	)		222		11,177
Factored receivables		4,088		519			(580	)		37		4,064
Consumer		420		372			(299	)		54		547
Mortgage warehouse		182		(60	)		—			—		122
	$	15,405	$	7,678		$	(4,315	)	$	325	$	19,093

(Dollars in thousands)	Beginning										Ending
Three months ended March 31, 2016	Balance		Provision			Charge-offs			Recoveries		Balance
Commercial real estate	$	1,489	$	129		$	—		$	1	$	1,619
Construction, land development, land		367		(169	)		—			—		198
1-4 family residential properties		274		22			(16	)		5		285
Farmland		134		(1	)		—			—		133
Commercial		5,276		25			—			30		5,331
Factored receivables		4,509		(440	)		(8	)		49		4,110
Consumer		216		30			(43	)		19		222
Mortgage warehouse		302		(107	)		—			—		195
	$	12,567	$	(511	)	$	(67	)	$	104	$	12,093

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents loans individually and collectively evaluated for impairment, as well as purchased credit impaired (“PCI”) loans, and their respective ALLL allocations:

(Dollars in thousands)	Loan Evaluation								ALLL Allocations
March 31, 2017	Individually		Collectively		PCI		Total loans		Individually		Collectively		PCI		Total ALLL
Commercial real estate	$	724	$	486,621	$	10,754	$	498,099	$	—	$	1,888	$	355	$	2,243
Construction, land development, land		415		105,846		3,588		109,849		25		541		—		566
1-4 family residential properties		1,266		101,671		2,293		105,230		—		160		—		160
Farmland		2,920		133,380		237		136,537		—		214		—		214
Commercial		25,159		763,025		4,580		792,764		2,034		8,143		1,000		11,177
Factored receivables		3,728		238,370		—		242,098		1,732		2,332		—		4,064
Consumer		133		28,282		—		28,415		—		547		—		547
Mortgage warehouse		—		122,244		—		122,244		—		122		—		122
	$	34,345	$	1,979,439	$	21,452	$	2,035,236	$	3,791	$	13,947	$	1,355	$	19,093

(Dollars in thousands)	Loan Evaluation								ALLL Allocations
December 31, 2016	Individually		Collectively		PCI		Total loans		Individually		Collectively		PCI		Total ALLL
Commercial real estate	$	1,456	$	427,918	$	12,863	$	442,237	$	100	$	1,358	$	355	$	1,813
Construction, land development, land		362		105,493		3,957		109,812		25		440		—		465
1-4 family residential properties		1,095		101,551		2,328		104,974		1		252		—		253
Farmland		1,333		140,045		237		141,615		—		170		—		170
Commercial		33,033		738,088		7,522		778,643		2,101		5,913		—		8,014
Factored receivables		3,176		235,022		—		238,198		1,546		2,542		—		4,088
Consumer		73		29,691		—		29,764		—		420		—		420
Mortgage warehouse		—		182,381		—		182,381		—		182		—		182
	$	40,528	$	1,960,189	$	26,907	$	2,027,624	$	3,773	$	11,277	$	355	$	15,405

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following is a summary of information pertaining to impaired loans. PCI loans that have not deteriorated subsequent to acquisition are not considered impaired and therefore do not require an allowance and are excluded from these tables.

	Impaired Loans and Purchased Credit						Impaired Loans
	Impaired Loans With a Valuation Allowance						Without a Valuation Allowance
(Dollars in thousands)	Recorded		Unpaid		Related		Recorded		Unpaid
March 31, 2017	Investment		Principal		Allowance		Investment		Principal
Commercial real estate	$	—	$	—	$	—	$	724	$	757
Construction, land development, land		281		279		25		134		136
1-4 family residential properties		—		—		—		1,266		1,391
Farmland		—		—		—		2,920		2,980
Commercial		15,118		15,261		2,034		10,041		10,131
Factored receivables		3,728		3,728		1,732		—		—
Consumer		—		—		—		133		132
Mortgage warehouse		—		—		—		—		—
PCI		2,702		3,006		1,355		—		—
	$	21,829	$	22,274	$	5,146	$	15,218	$	15,527

	Impaired Loans and Purchased Credit						Impaired Loans
	Impaired Loans With a Valuation Allowance						Without a Valuation Allowance
(Dollars in thousands)	Recorded		Unpaid		Related		Recorded		Unpaid
December 31, 2016	Investment		Principal		Allowance		Investment		Principal
Commercial real estate	$	517	$	517	$	100	$	939	$	1,011
Construction, land development, land		277		275		25		85		86
1-4 family residential properties		8		14		1		1,087		1,215
Farmland		—		—		—		1,333		1,364
Commercial		15,022		15,018		2,101		18,011		18,096
Factored receivables		3,176		3,176		1,546		—		—
Consumer		—		—		—		73		73
Mortgage warehouse		—		—		—		—		—
PCI		525		525		355		—		—
	$	19,525	$	19,525	$	4,128	$	21,528	$	21,845

The following table presents average impaired loans and interest recognized on impaired loans for the three months ended March 31, 2017 and 2016:

	Three Months Ended				Three Months Ended
	March 31, 2017				March 31, 2016
	Average		Interest		Average		Interest
(Dollars in thousands)	Impaired Loans		Recognized		Impaired Loans		Recognized
Commercial real estate	$	1,090	$	—	$	719	$	—
Construction, land development, land		389		—		—		—
1-4 family residential properties		1,180		1		628		1
Farmland		2,127		9		—		—
Commercial		29,096		122		10,109		100
Factored receivables		3,452		—		4,181		—
Consumer		103		—		18		—
Mortgage warehouse		—		—		—		—
PCI		1,613		—		974		—
	$	39,050	$	132	$	16,629	$	101

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Past Due and Nonaccrual Loans

The following is a summary of contractually past due and nonaccrual loans at March 31, 2017 and December 31, 2016:

	Past Due		Past Due 90
(Dollars in thousands)	30-89 Days		Days or More
March 31, 2017	Still Accruing		Still Accruing		Nonaccrual		Total
Commercial real estate	$	2,399	$	—	$	724	$	3,123
Construction, land development, land		—		—		415		415
1-4 family residential properties		1,075		—		1,213		2,288
Farmland		3,672		—		2,128		5,800
Commercial		10,448		371		19,984		30,803
Factored receivables		12,438		2,470		—		14,908
Consumer		620		—		133		753
Mortgage warehouse		—		—		—		—
PCI		219		—		5,913		6,132
	$	30,871	$	2,841	$	30,510	$	64,222

	Past Due		Past Due 90
(Dollars in thousands)	30-89 Days		Days or More
December 31, 2016	Still Accruing		Still Accruing		Nonaccrual		Total
Commercial real estate	$	699	$	144	$	1,163	$	2,006
Construction, land development, land		619		—		362		981
1-4 family residential properties		956		—		1,039		1,995
Farmland		3,583		141		541		4,265
Commercial		11,060		1,077		26,619		38,756
Factored receivables		11,921		2,153		—		14,074
Consumer		667		2		73		742
Mortgage warehouse		—		—		—		—
PCI		2,020		104		8,233		10,357
	$	31,525	$	3,621	$	38,030	$	73,176

The following table presents information regarding nonperforming loans at the dates indicated:

(Dollars in thousands)	March 31, 2017		December 31, 2016
Nonaccrual loans⁽¹⁾	$	30,510	$	38,030
Factored receivables greater than 90 days past due		2,470		2,153
Troubled debt restructurings accruing interest		3,611		5,123
	$	36,591	$	45,306

⁽¹⁾

Includes troubled debt restructurings of $8,973,000 and $13,263,000 at March 31, 2017 and December 31, 2016, respectively.

Credit Quality Information

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt, including: current collateral and financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes every loan and is performed on a regular basis. Large groups of smaller balance homogeneous loans, such as consumer loans, are analyzed primarily based on payment status. The Company uses the following definitions for risk ratings:

Pass:

Loans classified as pass are loans with low to average risk and not otherwise classified as substandard or doubtful.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Substandard:

Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the repayment of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful:

Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable.

PCI:

At acquisition, PCI loans had the characteristics of substandard loans and it was probable, at acquisition, that all contractually required principal and interest payments would not be collected. The Company evaluates these loans on a projected cash flow basis with this evaluation performed quarterly.

As of March 31, 2017 and December 31, 2016, based on the most recent analysis performed, the risk category of loans is as follows:

(Dollars in thousands)
March 31, 2017	Pass		Substandard		Doubtful		PCI		Total
Commercial real estate	$	485,653	$	1,692	$	—	$	10,754	$	498,099
Construction, land development, land		105,846		415		—		3,588		109,849
1-4 family residential		101,350		1,587		—		2,293		105,230
Farmland		129,763		6,537		—		237		136,537
Commercial		746,554		41,630		—		4,580		792,764
Factored receivables		239,754		930		1,414		—		242,098
Consumer		28,280		135		—		—		28,415
Mortgage warehouse		122,244		—		—		—		122,244
	$	1,959,444	$	52,926	$	1,414	$	21,452	$	2,035,236

(Dollars in thousands)
December 31, 2016	Pass		Substandard		Doubtful		PCI		Total
Commercial real estate	$	422,423	$	6,951	$	—	$	12,863	$	442,237
Construction, land development, land		105,493		362		—		3,957		109,812
1-4 family residential		101,339		1,307		—		2,328		104,974
Farmland		136,474		4,904		—		237		141,615
Commercial		729,634		41,487		—		7,522		778,643
Factored receivables		236,084		1,029		1,085		—		238,198
Consumer		29,688		76		—		—		29,764
Mortgage warehouse		182,381		—		—		—		182,381
	$	1,943,516	$	56,116	$	1,085	$	26,907	$	2,027,624

Troubled Debt Restructurings

The Company had a recorded investment in troubled debt restructurings of $12,584,000 and $18,386,000 as of March 31, 2017 and December 31, 2016, respectively. The Company had allocated specific allowances for these loans of $435,000 and $1,911,000 at March 31, 2017 and December 31, 2016, respectively, and had not committed to lend additional amounts. Troubled debt restructurings are the result of extending amortization periods, reducing contractual interest rates, or a combination thereof. The Company did not grant principal reductions on any restructured loans.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents loans modified as troubled debt restructurings that occurred during the three months ended March 31, 2017 and 2016:

Pre-Modification

Post-Modification

Outstanding

(Dollars in thousands)

Number of

Recorded

March 31, 2017

Loans

Investment

Commercial

186

Pre-Modification

Post-Modification

Outstanding

(Dollars in thousands)

Number of

Recorded

March 31, 2016

Loans

Investment

Commercial

5,730

During the three months ended March 31, 2017, the company had three loans modified as troubled debt restructurings with a recorded investment of $2,987,000 for which there were payment defaults within twelve months following the modification. The full recorded investment in one of these loans of $2,702,000 was charged off during the period. During the three months ended March 31, 2016, there were no defaults on any loans that were modified as troubled debt restructurings during the preceding twelve months. Default is determined at 90 or more days past due.

Purchased Credit Impaired Loans

The Company has loans that were acquired, for which there was, at acquisition, evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that all contractually required payments would not be collected. The outstanding contractually required principal and interest and the carrying amount of these loans included in the balance sheet amounts of loans at March 31, 2017 and December 31, 2016, are as follows:

	March 31,		December 31,
	2017		2016
Contractually required principal and interest:
Real estate loans	$	22,085	$	25,013
Commercial loans		6,706		9,703
Outstanding contractually required principal and interest	$	28,791	$	34,716
Gross carrying amount included in loans receivable	$	21,452	$	26,907

The changes in accretable yield during the three months ended March 31, 2017 and 2016 in regard to loans transferred at acquisition for which it was probable that all contractually required payments would not be collected are as follows:

	Three Months Ended March 31,
	2017			2016
Accretable yield, beginning balance	$	4,261		$	2,594
Additions		—			—
Accretion		(472	)		(517	)
Reclassification from nonaccretable to accretable yield		83			—
Disposals		(440	)		(13	)
Accretable yield, ending balance	$	3,432		$	2,064

NOTE 5 - GOODWILL AND INTANGIBLE ASSETS

Goodwill and intangible assets consist of the following:

(Dollars in thousands)		March 31, 2017				December 31, 2016
Goodwill		$	28,810			$	28,810

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	March 31, 2017							December 31, 2016
	Gross Carrying		Accumulated			Net Carrying		Gross Carrying		Accumulated			Net Carrying
(Dollars in thousands)	Amount		Amortization			Amount		Amount		Amortization			Amount
Core deposit intangibles	$	21,825	$	(9,234	)	$	12,591	$	21,825	$	(8,423	)	$	13,402
Other intangible assets		3,793		(961	)		2,832		6,006		(1,687	)		4,319
	$	25,618	$	(10,195	)	$	15,423	$	27,831	$	(10,110	)	$	17,721

The changes in goodwill and intangible assets during the three months ended March 31, 2017 and 2016 are as follows:

	Three Months Ended March 31,
(Dollars in thousands)	2017			2016
Beginning balance	$	46,531		$	27,854
Acquired intangibles		152			—
Divestiture		(1,339	)		—
Amortization of intangibles		(1,111	)		(977	)
Ending balance	$	44,233		$	26,877

NOTE 6 – Variable Interest Entities

Collateralized Loan Obligation Funds – Closed

The Company, through its subsidiary TCA, acted as the asset manager or provided certain middle and back office staffing and services to the asset manager of various CLO funds. TCA earned asset management fees in accordance with the terms of its asset management or staffing and services agreements associated with the CLO funds. TCA earned asset management fees totaling $1,717,000 and $1,629,000 for the three months ended March 31, 2017 and 2016, respectively. On March 31, 2017 the Company sold its membership interests in TCA as discussed in Note 2 – Business Combinations and Divestitures. As a result of the TCA sale, as of March 31, 2017 the Company no longer acted as asset manager or staffing and services provider for any CLO funds.

The following table summarizes the closed CLO offerings with assets managed by TCA:

	Offering	Offering
(Dollars in thousands)	Date	Amount
Trinitas CLO I, LTD (Trinitas I)	May 1, 2014	$	400,000
Trinitas CLO II, LTD (Trinitas II)	August 4, 2014	$	416,000
Doral CLO III, LTD (Doral III)	December 17, 2012	$	310,800
Trinitas CLO III, LTD (Trinitas III)	June 9, 2015	$	409,375

The securities sold in the above CLO offerings were issued in a series of tranches ranging from an AAA rated debt tranche to an unrated tranche of subordinated notes. The Company does not hold any of the securities issued in these CLO offerings. A related party of the Company holds insignificant interests in Trinitas II and Trinitas III.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company performed a consolidation analysis for the period prior to the TCA sale to determine whether the Company was required to consolidate the assets, liabilities, equity or operations of the above closed CLO funds in its financial statements. The Company concluded that the closed CLO funds were variable interest entities; however, the Company, through TCA, did not hold variable interests in the entities as the Company’s interest in the CLO funds was limited to the asset management fees payable to TCA under their asset management agreements and the interests of its related parties were insignificant. The Company concluded that the asset management fees were not variable interests in the CLO funds as (a) the asset management fees were commensurate with the services provided, (b) the asset management agreements included only terms, conditions, or amounts that were customarily present in arrangements for similar services negotiated on an arm’s-length basis, and (c) the Company did not hold other interests in the CLO funds (including interests held through related parties) that individually or in the aggregate would absorb more than an insignificant amount of the CLO funds’ expected losses or receive more than an insignificant amount of the CLO funds’ expected residual returns. Consequently, the Company concluded that it was not required to consolidate the assets, liabilities, equity or operations of these CLO funds in its financial statements. Upon the sale of TCA on March 31, 2017, the Company’s interest in the CLOs through the TCA asset management fees was terminated. The sale of TCA did not change the results of the consolidation analysis.

The following table summarizes the closed CLO offerings for which TCA is not the asset manager, but provides certain middle and back office services to the asset manager:

	Offering	Offering
(Dollars in thousands)	Date	Amount
Trinitas CLO IV, LTD (Trinitas IV)	June 2, 2016	$	406,650
Trinitas CLO V, LTD (Trinitas V)	September 22, 2016	$	409,000

The securities sold in the above CLO offerings were issued in a series of tranches ranging from an AAA rated debt tranche to an unrated tranche of subordinated notes. The Company holds investments in the subordinated notes of Trinitas IV and Trinitas V with a carrying amount of $6,626,000, which are classified as held to maturity securities within the Company’s consolidated balance sheet at March 31, 2017.

The Company performed a consolidation analysis for the period prior to the TCA sale to confirm whether the Company was required to consolidate the assets, liabilities, equity or operations of the above closed CLO funds in its financial statements. The Company concluded that the closed CLO funds were variable interest entities and that the Company holds variable interests in the entities in the form of its investment in the subordinated notes of entities. However, the Company also concluded that as TCA was not the asset manager of the CLO funds, the Company did not have the power to direct the activities that most significantly impact the entities’ economic performance. As a result, the Company was not the primary beneficiary and therefore was not required to consolidate the assets, liabilities, equity, or operations of the closed CLO funds in the Company’s financial statements. Upon the sale of TCA on March 31, 2017, the Company is no longer providing staffing and services and the only remaining interest in the CLOs is the Company’s investment in the subordinated notes of the entities. The sale of TCA did not change the results of the consolidation analysis.

Collateralized Loan Obligation Funds – Warehouse Phase

On June 17, 2016, Trinitas CLO VI, Ltd. (“Trinitas VI”) was formed to be the issuer of a CLO offering. Trinitas VI is capitalized with subordinated debt issued to the Company and third party investors. The entity entered into a warehouse credit agreement in order to begin acquiring senior secured loan assets that will comprise the initial collateral pool of the CLOs once issued. When finalized, Trinitas VI will use the proceeds of the debt and equity interests sold in the offering for the final CLO securitization structure to repay the initial warehouse phase debt and equity holders. In the final CLO securitization structure, interest and principal repayment of the leveraged loans held by Trinitas VI will be used to repay debt holders with any excess cash flows used to provide a return on capital to equity investors. During its warehousing period, TCA provides middle and back office support as a staffing and services provider for Trinitas VI. TCA does not earn staffing and services fees from Trinitas VI during the warehouse phase.

At March 31, 2017, the Company’s loss exposure to Trinitas VI is limited to its $22,181,000 investment in the entity which is classified as other assets within the Company’s consolidated balance sheet. Income from the Company’s investment in CLO warehouse entities totaled $964,000 and $984,000 during the three months ended March 31, 2017 and 2016, respectively, and is included in other noninterest income within the Company’s consolidated statements of income.

The Company performed a consolidation analysis of Trinitas VI during the warehouse phase and concluded that Trinitas VI is a variable interest entity and that the Company holds a variable interest in the entity that could potentially be significant to the entity in the form of its investment in the subordinated notes of the entity. However, the Company also concluded that since the Company is

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

not the portfolio manager for Trinitas VI, the Company does not have the power to direct the activities that most significantly impact the entity’s economic performance. As a result, the Company is not the primary beneficiary and therefore is not required to consolidate the assets, liabilities, equity, or operations of the entity in the Company’s financial statements. The sale of TCA did not change the results of the consolidation analysis.

NOTE 7 - Deposits

Deposits at March 31, 2017 and December 31, 2016 are summarized as follows:

(Dollars in thousands)	March 31, 2017		December 31, 2016
Noninterest bearing demand	$	382,009	$	363,351
Interest bearing demand		329,201		340,362
Individual retirement accounts		100,436		103,022
Money market		203,686		213,253
Savings		173,258		171,354
Certificates of deposit		767,602		756,351
Brokered deposits		68,096		68,092
Total Deposits	$	2,024,288	$	2,015,785

At March 31, 2017, scheduled maturities of certificates of deposits, individual retirement accounts and brokered deposits are as follows:

(Dollars in thousands)	March 31, 2017
Within one year	$	678,352
After one but within two years		175,164
After two but within three years		46,520
After three but within four years		16,504
After four but within five years		19,343
After five years		251
Total	$	936,134

Time deposits, including individual retirement accounts, certificates of deposit, and brokered deposits, with individual balances of $250,000 and greater totaled $161,317,000 and $149,258,000 at March 31, 2017 and December 31, 2016, respectively.

NOTE 8 - Legal Contingencies

Various legal claims have arisen from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.

NOTE 9 - OFF-BALANCE SHEET LOAN COMMITMENTS

From time to time, the Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments.

The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet financial instruments.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The contractual amounts of financial instruments with off-balance sheet risk were as follows:

	March 31, 2017				December 31, 2016
(Dollars in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	15,985	$	22,925	$	7,345	$	7,580
Unused lines of credit		98,047		150,182		109,611		145,475
Standby letters of credit		2,371		5,128		2,547		4,706

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by the Company, upon extension of credit, is based on management’s credit evaluation of the customer.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, the Company has rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The credit risk to the Company in issuing letters of credit is essentially the same as that involved in extending loan facilities to its customers.

NOTE 10 - Fair Value Disclosures

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The methods of determining the fair value of assets and liabilities presented in this note are consistent with our methodologies disclosed in Note 15 of the Company’s 2016 Form 10-K.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Assets measured at fair value on a recurring basis are summarized in the table below. There were no liabilities measured at fair value on a recurring basis at March 31, 2017 and December 31, 2016.

(Dollars in thousands)	Fair Value Measurements Using						Total
March 31, 2017	Level 1		Level 2		Level 3		Fair Value
Securities available for sale
U.S. Government agency obligations	$	—	$	158,216	$	—	$	158,216
U.S. Treasury notes		—		4,849		—		4,849
Mortgage-backed securities, residential		—		23,840		—		23,840
Asset backed securities		—		12,840		—		12,840
State and municipal		—		25,186		—		25,186
Corporate bonds		—		27,361		—		27,361
SBA pooled securities		—		149		—		149
Mutual fund		2,011		—		—		2,011
	$	2,011	$	252,441	$	—	$	254,452

(Dollars in thousands)	Fair Value Measurements Using						Total
December 31, 2016	Level 1		Level 2		Level 3		Fair Value
Securities available for sale
U.S. Government agency obligations	$	—	$	180,942	$	—	$	180,942
Mortgage-backed securities, residential		—		24,990		—		24,990
Asset backed securities		—		12,902		—		12,902
State and municipal		—		26,637		—		26,637
Corporate bonds		—		27,390		—		27,390
SBA pooled securities		—		157		—		157
Mutual fund		2,011		—		—		2,011
	$	2,011	$	273,018	$	—	$	275,029

There were no transfers between levels during 2017 or 2016.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Assets measured at fair value on a non-recurring basis are summarized in the table below. There were no liabilities measured at fair value on a non-recurring basis at March 31, 2017 and December 31, 2016.

(Dollars in thousands)	Fair Value Measurements Using						Total
March 31, 2017	Level 1		Level 2		Level 3		Fair Value
Impaired loans
Commercial real estate	$	—	$	—	$	—	$	—
Construction, land development, land		—		—		256		256
1-4 family residential properties		—		—		—		—
Commercial		—		—		13,084		13,084
Factored receivables		—		—		1,996		1,996
PCI		—		—		1,347		1,347
Other real estate owned⁽¹⁾
Commercial		—		—		92		92
	$	—	$	—	$	16,775	$	16,775

(Dollars in thousands)	Fair Value Measurements Using						Total
December 31, 2016	Level 1		Level 2		Level 3		Fair Value
Impaired loans
Commercial real estate	$	—	$	—	$	417	$	417
Construction, land development, land		—		—		252		252
1-4 family residential properties		—		—		7		7
Commercial		—		—		12,921		12,921
Factored receivables		—		—		1,630		1,630
PCI		—		—		170		170
Other real estate owned⁽¹⁾
Commercial		—		—		698		698
1-4 family residential properties		—				485		485
Construction, land development, land		—		—		467		467
	$	—	$	—	$	17,047	$	17,047

⁽¹⁾ Represents the fair value of OREO that was adjusted during the period and subsequent to its initial classification as OREO

Impaired Loans with Specific Allocation of ALLL: A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due pursuant to the contractual terms of the loan agreement. Impairment is measured by estimating the fair value of the loan based on the present value of expected cash flows, the market price of the loan, or the underlying fair value of the loan’s collateral. For real estate loans, fair value of the impaired loan’s collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value. For non-real estate loans, fair value of the impaired loan’s collateral may be determined using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

OREO: OREO is primarily comprised of real estate acquired in partial or full satisfaction of loans. OREO is recorded at its estimated fair value less estimated selling and closing costs at the date of transfer, with any excess of the related loan balance over the fair value less expected selling costs charged to the ALLL. Subsequent changes in fair value are reported as adjustments to the carrying amount and are recorded against earnings. The Company outsources the valuation of OREO with material balances to third party appraisers. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value.

The estimated fair values of the Company’s financial instruments not measured at fair value on a recurring or non-recurring basis at March 31, 2017 and December 31, 2016 were as follows:

(Dollars in thousands)	Carrying		Fair Value Measurements Using						Total
March 31, 2017	Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	126,084	$	126,084	$	—	$	—	$	126,084
Securities - held to maturity		28,882		—		23,540		6,532		30,072
Loans not previously presented, net		1,999,460		—		—		2,008,707		2,008,707
FHLB stock		7,167	N/A		N/A		N/A		N/A
Accrued interest receivable		11,455		—		11,455		—		11,455

Financial liabilities:
Deposits		2,024,288		—		2,029,332		—		2,029,332
Customer repurchase agreements		10,468		—		10,468		—		10,468
Federal Home Loan Bank advances		200,000		—		200,000		—		200,000
Subordinated notes		48,757		—		50,737		—		50,737
Junior subordinated debentures		32,840		—		33,046		—		33,046
Accrued interest payable		1,805		—		1,805		—		1,805

(Dollars in thousands)	Carrying		Fair Value Measurements Using						Total
December 31, 2016	Amount		Level 1		Level 2		Level 3		Fair Value
Financial assets:
Cash and cash equivalents	$	114,514	$	114,514	$	—	$	—	$	114,514
Securities - held to maturity		29,352		—		27,498		3,323		30,821
Loans not previously presented, net		1,996,822		—		—		2,002,487		2,002,487
FHLB stock		8,430	N/A		N/A		N/A		N/A
Accrued interest receivable		12,663		—		12,663		—		12,663

Financial liabilities:
Deposits		2,015,785		—		2,014,922		—		2,014,922
Customer repurchase agreements		10,490		—		10,490		—		10,490
Federal Home Loan Bank advances		230,000		—		230,000		—		230,000
Subordinated notes		48,734		—		50,920		—		50,920
Junior subordinated debentures		32,740		—		32,905		—		32,905
Accrued interest payable		2,682		—		2,682		—		2,682

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 11 - Regulatory Matters

The Company (on a consolidated basis) and TBK Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s or TBK Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and TBK Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Company is subject to the Basel III regulatory capital framework. Beginning in January 2016, the implementation of the capital conservation buffer was effective for the Company starting at the 0.625% level and increasing 0.625% each year thereafter, until it reaches 2.5% on January 1, 2019. The capital conservation buffer was 1.25% and 0.625% at March 31, 2017 and December 31, 2016, respectively. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers.

Quantitative measures established by regulation to ensure capital adequacy require the Company and TBK Bank to maintain minimum amounts and ratios (set forth in the table below) of total, common equity Tier 1, and Tier 1 capital to risk weighted assets, and of Tier 1 capital to average assets. Management believes, as of March 31, 2017 and December 31, 2016, the Company and TBK Bank meet all capital adequacy requirements to which they are subject, including the capital conservation buffer requirement.

As of March 31, 2017 and December 31, 2016, TBK Bank’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” TBK Bank must maintain minimum total risk based, common equity Tier 1 risk based, Tier 1 risk based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since March 31, 2017 that management believes have changed TBK Bank’s category.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The actual capital amounts and ratios for the Company and TBK Bank are presented in the following table as of March 31, 2017 and December 31, 2016. The capital adequacy amounts and ratios below do not include the capital conservation buffer in effect at each respective date.

									To Be Well
									Capitalized Under
					Minimum for Capital				Prompt Corrective
(Dollars in thousands)	Actual				Adequacy Purposes				Action Provisions
As of March 31, 2017	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	359,884		14.9%	$	193,675		8.0%	N/A		N/A
TBK Bank, SSB	$	297,150		12.9%	$	183,631		8.0%	$	229,539		10.0%

Tier 1 capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	291,704		12.0%	$	145,256		6.0%	N/A		N/A
TBK Bank, SSB	$	277,801		12.1%	$	137,723		6.0%	$	183,631		8.0%

Common equity Tier 1 capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	249,962		10.3%	$	108,942		4.5%	N/A		N/A
TBK Bank, SSB	$	277,801		12.1%	$	103,292		4.5%	$	149,200		6.5%

Tier 1 capital (to average assets)
Triumph Bancorp, Inc.	$	291,704		11.3%	$	103,114		4.0%	N/A		N/A
TBK Bank, SSB	$	277,801		11.0%	$	101,278		4.0%	$	126,598		5.0%

As of December 31, 2016
Total capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	342,059		14.6%	$	187,449		8.0%	N/A		N/A
TBK Bank, SSB	$	293,313		12.9%	$	181,640		8.0%	$	227,050		10.0%

Tier 1 capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	277,605		11.8%	$	140,587		6.0%	N/A		N/A
TBK Bank, SSB	$	277,593		12.2%	$	136,230		6.0%	$	181,640		8.0%

Common equity Tier 1 capital (to risk weighted assets)
Triumph Bancorp, Inc.	$	238,439		10.2%	$	105,440		4.5%	N/A		N/A
TBK Bank, SSB	$	277,593		12.2%	$	102,173		4.5%	$	147,583		6.5%

Tier 1 capital (to average assets)
Triumph Bancorp, Inc.	$	277,605		10.9%	$	102,303		4.0%	N/A		N/A
TBK Bank, SSB	$	277,593		11.0%	$	100,802		4.0%	$	126,002		5.0%

Dividends paid by banks are limited to, without prior regulatory approval, current year earnings and earnings less dividends paid during the preceding two years.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – STOCKHOLDERS’ EQUITY

The following summarizes the capital structure of Triumph Bancorp, Inc.

Common Stock

	Common Stock
	March 31, 2017			December 31, 2016
Shares authorized		50,000,000			50,000,000
Shares issued		18,159,539			18,154,365
Treasury shares		(80,770	)		(76,118	)
Shares outstanding		18,078,769			18,078,247
Par value per share	$	0.01		$	0.01

Preferred Stock

	Preferred Stock
	Series A						Series B
(Dollars in thousands, except per share amounts)	March 31, 2017			December 31, 2016			March 31, 2017			December 31, 2016
Shares authorized		50,000			50,000			115,000			115,000
Shares issued		45,500			45,500			51,956			51,956
Shares outstanding		45,500			45,500			51,956			51,956
Par value per share	$	0.01		$	0.01		$	0.01		$	0.01
Liquidation preference per share	$	100		$	100		$	100		$	100
Liquidation preference amount	$	4,550		$	4,550		$	5,196		$	5,196
Dividend rate	Prime + 2%			Prime + 2%				8.00	%		8.00	%
Dividend rate - floor		8.00	%		8.00	%	N/A			N/A
Subsequent dividend payment dates	Quarterly			Quarterly			Quarterly			Quarterly
Convertible to common stock	Yes			Yes			Yes			Yes
Conversion period	Anytime			Anytime			Anytime			Anytime
Conversion ratio - preferred to common	6.94008			6.94008			6.94008			6.94008

NOTE 13 – STOCK BASED COMPENSATION

Stock based compensation expense that has been charged against income was $702,000 and $353,000 for the three months ended March 31, 2017 and 2016, respectively.

2014 Omnibus Incentive Plan

The Company’s 2014 Omnibus Incentive Plan (“Omnibus Incentive Plan”) provides for the grant of nonqualified and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock units, and other awards that may be settled in, or based upon the value of, the Company’s common stock. The aggregate number of shares of common stock available for issuance under the Omnibus Incentive Plan is 1,200,000 shares.

Restricted Stock Awards

A summary of changes in the Company’s nonvested Restricted Stock Awards (“RSAs”) under the Omnibus Incentive Plan for the three months ended March 31, 2017 were as follows:

				Weighted-Average
				Grant-Date
Nonvested RSAs	Shares			Fair Value
Nonvested at January 1, 2017		126,644		$	14.92
Granted		5,174			27.05
Vested		(17,860	)		19.11
Forfeited		(251	)		13.50
Nonvested at March 31, 2017		113,707		$	14.81

RSAs granted to employees under the Omnibus Incentive Plan typically vest over two to four years. Compensation expense for RSAs granted under the Omnibus Incentive Program will be recognized over the vesting period of the awards based on the fair value of the

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

stock at the issue date. As of March 31, 2017, there was $534,000 of unrecognized compensation cost related to nonvested RSAs granted under the Omnibus Incentive Plan. The cost is expected to be recognized over a remaining period of 2.50 years.

Stock Options

A summary of the changes in the Company’s stock options under the Omnibus Incentive Plan as of and for the three months ended March 31, 2017 were as follows:

					Weighted-Average
					Remaining		Aggregate
			Weighted-Average		Contractual Term		Intrinsic Value
Stock Options	Shares		Exercise Price		(In Years)		(In Thousands)
Outstanding at January 1, 2017		163,661	$	15.87
Granted		—		—
Exercised		—		—
Forfeited or expired		—		—
Outstanding at March 31, 2017		163,661	$	15.87		7.16	$	1,625

Fully vested shares and shares expected to vest at March 31, 2017		163,661	$	15.87		7.16	$	1,625

Shares exercisable at March 31, 2017		34,398	$	15.87		0.25	$	342

There were no options granted or exercised during the three months ended March 31, 2017 and 2016.

Stock options awarded to employees under the Omnibus Incentive Plan are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant, vest over four years, and have ten year contractual terms. Contractual terms of exercisable options may be shortened due to termination of a participant’s employment. The fair value of stock options granted is estimated at the date of grant using the Black-Scholes option-pricing model. Expected volatilities are determined based on historical volatilities of a peer group of companies with a similar size, industry, stage of life cycle, and capital structure. The expected term of options granted is determined based on the SEC simplified method, which calculates the expected term as the mid-point between the weighted average time to vesting and the contractual term. The risk-free interest rate for the expected term of options is derived from the Treasury constant maturity yield curve on the valuation date.

As of March 31, 2017, there was $360,000 of unrecognized compensation cost related to nonvested stock options granted under the Omnibus Incentive Plan. The cost is expected to be recognized over a remaining period of 3.00 years.

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 14 – EARNINGS PER SHARE

The factors used in the earnings per share computation follow:

	Three Months Ended March 31,
(Dollars in thousands)	2017		2016
Basic
Net income to common stockholders	$	10,281	$	4,812
Weighted average common shares outstanding		17,955,144		17,816,930
Basic earnings per common share	$	0.57	$	0.27
Diluted
Net income to common stockholders	$	10,281	$	4,812
Dilutive effect of preferred stock		192		—
Net income to common stockholders - diluted	$	10,473	$	4,812
Weighted average common shares outstanding		17,955,144		17,816,930
Add: Dilutive effects of restricted stock		87,094		113,788
Add: Dilutive effects of assumed exercises of stock warrants		145,896		50,558
Add: Dilutive effects of assumed exercises of stock options		47,873		—
Add: Dilutive effects of assumed conversion of Preferred A		315,773		—
Add: Dilutive effects of assumed conversion of Preferred B		360,578		—
Average shares and dilutive potential common shares		18,912,358		17,981,276
Diluted earnings per common share	$	0.55	$	0.27

Shares that were not considered in computing diluted earnings per common share because they were antidilutive are as follows:

	Three Months Ended March 31,
	2017		2016
Shares assumed to be converted from Preferred Stock Series A		—		315,773
Shares assumed to be converted from Preferred Stock Series B		—		360,578
Restricted stock awards		—		—
Stock options		—		—

TRIUMPH BANCORP, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 15 – BUSINESS SEGMENT INFORMATION

The following table presents the Company’s operating segments. The accounting policies of the segments are substantially similar to those described in the “Summary of Significant Accounting Policies” in Note 1 of the Company’s 2016 Form 10-K. Transactions between segments consist primarily of borrowed funds. Intersegment interest expense is allocated to the Factoring segment based on the Company’s prime rate. The provision for loan loss is allocated based on the segment’s allowance for loan loss determination. Noninterest income and expense directly attributable to a segment are assigned to it. Taxes are paid on a consolidated basis but not allocated for segment purposes. The Factoring segment includes only factoring originated by TBC. General factoring services not originated through TBC are included in the Banking segment. On March 31, 2017, we sold our 100% membership interest in TCA. As a result, the Asset Management segment will have no operations subsequent to March 31, 2017.

(Dollars in thousands)						Asset
Three Months Ended March 31, 2017	Banking		Factoring			Management		Corporate			Consolidated
Total interest income	$	27,499	$	8,705		$	3	$	125		$	36,332
Intersegment interest allocations		1,289		(1,289	)		—		—			—
Total interest expense		3,214		—			—		1,299			4,513
Net interest income (expense)		25,574		7,416			3		(1,174	)		31,819
Provision for loan losses		7,021		582			—		75			7,678
Net interest income after provision		18,553		6,834			3		(1,249	)		24,141
Gain on sale of subsidiary		—		—			—		20,860			20,860
Other noninterest income		3,531		670			1,717		507			6,425
Noninterest expense		21,969		5,595			1,456		5,817			34,837
Operating income (loss)	$	115	$	1,909		$	264	$	14,301		$	16,589

(Dollars in thousands)							Asset
Three Months Ended March 31, 2016	Banking			Factoring			Management		Corporate			Consolidated
Total interest income	$	17,426		$	7,185		$	31	$	251		$	24,893
Intersegment interest allocations		1,001			(1,001	)		—		—			—
Total interest expense		2,102			—			—		302			2,404
Net interest income (expense)		16,325			6,184			31		(51	)		22,489
Provision for loan losses		(124	)		(470	)		—		83			(511	)
Net interest income after provision		16,449			6,654			31		(134	)		23,000
Noninterest income		2,015			445			1,671		850			4,981
Noninterest expense		13,582			4,573			1,346		577			20,078
Operating income (loss)	$	4,882		$	2,526		$	356	$	139		$	7,903

(Dollars in thousands)					Asset
March 31, 2017	Banking		Factoring		Management		Corporate		Eliminations			Consolidated
Total assets	$	2,568,126	$	227,956	$	—	$	409,345	$	(570,069	)	$	2,635,358
Gross loans	$	1,954,758	$	218,601	$	—	$	12,360	$	(150,483	)	$	2,035,236

(Dollars in thousands)					Asset
December 31, 2016	Banking		Factoring		Management		Corporate		Eliminations			Consolidated
Total assets	$	2,588,509	$	223,994	$	4,879	$	391,745	$	(568,060	)	$	2,641,067
Gross loans	$	1,961,552	$	212,784	$	—	$	1,866	$	(148,578	)	$	2,027,624

item 2

Management’s Discussion and Analysis of

Financial Condition and Results of Operations

This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Company’s interim consolidated financial statements and the accompanying notes included elsewhere in this Quarterly Report on Form 10-Q and with the consolidated financial statements and accompanying notes and other detailed information appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of our future financial outcomes. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. See the “Forward-Looking Statements” section of this discussion for further information on forward-looking statements.

Company Overview

We are a financial holding company headquartered in Dallas, Texas and registered under the Bank Holding Company Act. Through our wholly owned bank subsidiary, TBK Bank, we offer traditional banking services as well as commercial finance product lines focused on businesses that require specialized financial solutions. Our banking operations include a full suite of lending and deposit products and services focused on our local market areas. These activities generate a stable source of core deposits and a diverse asset base to support our overall operations. Our commercial finance product lines include factoring, asset based lending, equipment lending, healthcare lending, and premium finance products offered on a nationwide basis. These product offerings supplement the asset generation capacity in our community banking markets and enhance the overall yield of our loan portfolio, enabling us to earn attractive risk-adjusted net interest margins. We believe our integrated business model distinguishes us from other banks and non-bank financial services companies in the markets in which we operate. As of March 31, 2017, we had consolidated total assets of $2.635 billion, total loans held for investment of $2.035 billion, total deposits of $2.024 billion and total stockholders’ equity of $300.4 million.

Most of our products and services share basic processes and have similar economic characteristics. However, our factoring subsidiary operates in a highly specialized niche and earns substantially higher yields on its factored accounts receivable portfolio than our other lending products. This business also has a legacy and structure as a standalone company. In addition, through our Triumph Capital Advisors, LLC asset management subsidiary, we provided fee-based asset management services distinct from our traditional banking offerings and operations. As a result, we have determined our reportable segments are Banking, Factoring, Asset Management, and Corporate. For the three months ended March 31, 2017, our Banking segment generated 49% of our total revenue (comprised of interest and noninterest income), our Factoring segment generated 15% of our total revenue, our Asset Management segment generated 3% of our total revenue, and our Corporate segment generated 33% of our total revenue. As discussed below, on March 31, 2017 we sold our 100% membership interest in Triumph Capital Advisors, LLC and will no longer provide fee-based asset management services.

First Quarter 2017 Overview

Net income available to common stockholders for the three months ended March 31, 2017 was $10.3 million, or $0.55 per diluted share, compared to net income available to common stockholders for the three months ended March 31, 2016 of $4.8 million, or $0.27 per diluted share. Excluding material gains and expenses related to merger and acquisition related activities, including divestitures, adjusted net income to common stockholders was $0.3 million, or $0.02 per diluted share, for the three months ended March 31, 2017. For the three months ended March 31, 2017, our return on average common equity was 14.66% and our return on average assets was 1.62%.

At March 31, 2017, we had total assets of $2.635 billion, including gross loans of $2.035 billion, compared to $2.641 billion of total assets and $2.028 billion of gross loans at December 31, 2016. Organic loan growth totaled $7 million during the three months ended March 31, 2017. Our commercial finance product lines increased from $694 million in aggregate as of December 31, 2016 to $714 million as of March 31, 2017, an increase of 3%, and constitute 35% of our total loan portfolio at March 31, 2017.

At March 31, 2017, we had total liabilities of $2.335 billion, including total deposits of $2.024 billion, compared to $2.352 billion of total liabilities and $2.016 billion of total deposits at December 31, 2016. Organic deposit growth totaled $8 million during the three months ended March 31, 2017.

At March 31, 2017, we had total stockholders' equity of $300.4 million. During the three months ended March 31, 2017, total stockholders’ equity increased $11 million, primarily due to our net income for the period. Capital ratios remained strong with Tier 1 capital and total capital to risk weighted assets ratios of 12.0% and 14.9%, respectively, at March 31, 2017.

Triumph Capital Advisors

On March 31, 2017, the Company sold its 100% membership interest in Triumph Capital Advisors, LLC (“TCA”). As part of the TCA sale on March 31, 2017, the Company:

•

Received total consideration with a fair value of $22.7 million, comprised of cash of $10.6 million, a seller financed loan receivable of $10.5 million, and a revenue share earn-out asset valued at $1.6 million.

•

Recorded a pre-tax gain on sale of $20.9 million, net of $0.4 million of direct transaction costs.

•

Incurred other indirect transaction related costs of $0.3 million and accrued $4.8 million in incremental bonus expense for the anticipated amount expected to be paid to team members to recognize their contribution to the transaction and building the value realized in the sale of the business.

The TCA sale resulted in a net pre-tax contribution to earnings for the three months ended March 31, 2017 of $15.7 million, or approximately $10.0 million net of tax. See Note 2 – Business Combinations and Divestitures in the accompanying condensed notes to the consolidated financial statements included elsewhere in this report for additional details of the TCA sale and its expected impact on our consolidated financial statements.

ColoEast Bankshares, Inc.

On August 1, 2016, the Company acquired ColoEast Bankshares, Inc. (“ColoEast”) and its community banking subsidiary, Colorado East Bank & Trust, which was merged into TBK Bank upon closing. As part of the ColoEast acquisition, the Company acquired loans with a fair value of $461 million, acquired investment securities with a fair value of $162 million, and assumed $653 million of customer deposits. When compared to the three months ended March 31, 2016, the operating results for the three months ended March 31, 2017 are reflective of the significantly larger assets, liabilities, personnel, and infrastructure resulting from the ColoEast acquisition, which affects comparability period over period.

Commercial Finance Product Lines

A key element of our strategy is to supplement the asset generation capacity in our community banking markets with commercial finance product lines which are offered on a nationwide basis and which serve to enhance the overall yield of our portfolio. These products include our factoring services, provided principally in the transportation sector (though increasingly in other industries as well), our asset based lending and equipment finance products marketed under our Triumph Commercial Finance brand, the healthcare asset based lending products offered under our Triumph Healthcare Finance brand, and premium finance products marketed under our Triumph Premium Finance brand. Our aggregate outstanding balances for these products increased from $693.7 million as of December 31, 2016 to $713.6 million as of March 31, 2017. These increases were driven by organic growth.

The following table sets forth our commercial finance product lines as of March 31, 2017 and December 31, 2016:

	March 31,		December 31,
(Dollars in thousands)	2017		2016
Commercial finance
Equipment	$	203,251	$	190,393
Asset based lending (general)		166,917		161,454
Asset based lending (healthcare)		78,208		79,668
Premium finance		23,162		23,971
Factored receivables		242,098		238,198
Total commercial finance loans	$	713,636	$	693,684

Financial Highlights

The Company’s key financial highlights as of and for the three months ended March 31, 2017, as compared to the prior period, are shown below:

	Three Months Ended March 31,
(Dollars in thousands, except per share amounts)	2017			2016
Income Statement Data:
Interest income	$	36,332		$	24,893
Interest expense		4,513			2,404
Net interest income		31,819			22,489
Provision for loan losses		7,678			(511	)
Net interest income after provision		24,141			23,000
Gain on sale of subsidiary		20,860			—
Other noninterest income		6,425			4,981
Noninterest income		27,285			4,981
Noninterest expense		34,837			20,078
Net income before income taxes		16,589			7,903
Income tax expense		6,116			2,897
Net income		10,473			5,006
Dividends on preferred stock		(192	)		(194	)
Net income available to common stockholders	$	10,281		$	4,812

Per Share Data:
Basic earnings per common share	$	0.57		$	0.27
Diluted earnings per common share	$	0.55		$	0.27
Weighted average shares outstanding - basic		17,955,144			17,816,930
Weighted average shares outstanding - diluted		18,912,358			17,981,276

Adjusted Per Share Data⁽¹⁾:
Adjusted diluted earnings per common share	$	0.02		$	0.27
Adjusted weighted average shares outstanding - diluted		18,236,005			17,981,276

Performance ratios - Annualized⁽²⁾:
Return on average assets		1.62	%		1.20	%
Return on average total equity		14.44	%		7.39	%
Return on average common equity		14.66	%		7.37	%
Return on average tangible common equity⁽¹⁾		17.49	%		8.23	%
Yield on loans		7.15	%		7.84	%
Adjusted yield on loans⁽¹⁾		6.93	%		7.47	%
Cost of interest bearing deposits		0.71	%		0.74	%
Cost of total deposits		0.58	%		0.64	%
Cost of total funds		0.79	%		0.69	%
Net interest margin		5.37	%		5.90	%
Adjusted net interest margin⁽¹⁾		5.19	%		5.61	%
Efficiency ratio		58.94	%		73.09	%
Adjusted efficiency ratio⁽¹⁾		77.65	%		73.09	%
Net noninterest expense to average assets		1.17	%		3.61	%
Adjusted net noninterest expense to average assets⁽¹⁾		3.60	%		3.61	%

	March 31,			December 31,
(Dollars in thousands, except per share amounts)	2017			2016
Balance Sheet Data:
Total assets	$	2,635,358		$	2,641,067
Cash and cash equivalents		126,084			114,514
Investment securities		283,334			304,381
Loans held for investment, net		2,016,143			2,012,219
Total liabilities		2,334,933			2,351,722
Noninterest bearing deposits		382,009			363,351
Interest bearing deposits		1,642,279			1,652,434
FHLB advances		200,000			230,000
Subordinated notes		48,757			48,734
Junior subordinated debentures		32,840			32,740
Total stockholders’ equity		300,425			289,345
Preferred stockholders' equity		9,746			9,746
Common stockholders' equity		290,679			279,599

Per Share Data:
Book value per share	$	16.08		$	15.47
Tangible book value per share⁽¹⁾	$	13.63		$	12.89
Shares outstanding end of period		18,078,769			18,078,247

Asset Quality ratios⁽³⁾:
Past due to total loans		3.16	%		3.61	%
Nonperforming loans to total loans		1.80	%		2.23	%
Nonperforming assets to total assets		1.92	%		1.98	%
ALLL to nonperforming loans		52.18	%		34.00	%
ALLL to total loans		0.94	%		0.76	%
Net charge-offs to average loans⁽⁴⁾		0.20	%		0.25	%

Capital ratios:
Tier 1 capital to average assets		11.32	%		10.85	%
Tier 1 capital to risk-weighted assets		12.05	%		11.85	%
Common equity Tier 1 capital to risk-weighted assets		10.32	%		10.18	%
Total capital to risk weighted assets		14.87	%		14.60	%
Total stockholders' equity to total assets		11.40	%		10.96	%
Tangible common stockholders' equity ratio⁽¹⁾		9.51	%		8.98	%

⁽¹⁾

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. The non-GAAP measures used by the Company include the following:

•

“Adjusted diluted earnings per common share” is defined as adjusted net income available to common stockholders divided by adjusted weighted average diluted common shares outstanding. Excluded from net income available to common stockholders are material gains and expenses related to merger and acquisition related activities, including divestitures, net of tax. In our judgment, the adjustments made to net income available to common stockholders allow management and investors to better assess our performance in relation to our core net income by removing the volatility associated with certain acquisition related items and other discrete items that are unrelated to our core business. Weighted average diluted common shares outstanding are adjusted as a result of changes in their dilutive properties given the gain and expense adjustments described herein.

•

“Tangible common stockholders’ equity” is common stockholders’ equity less goodwill and other intangible assets.

•

“Total tangible assets” is defined as total assets less goodwill and other intangible assets.

•

“Tangible book value per share” is defined as tangible common stockholders’ equity divided by total common shares outstanding. This measure is important to investors interested in changes from period-to-period in book value per share exclusive of changes in intangible assets.

•

“Tangible common stockholders’ equity ratio” is defined as the ratio of tangible common stockholders’ equity divided by total tangible assets. We believe that this measure is important to many investors in the marketplace who are interested in relative changes from period-to period in common equity and total assets, each exclusive of changes in intangible assets.

•

“Return on average tangible common equity” is defined as net income available to common stockholders divided by average tangible common stockholders’ equity.

•

“Adjusted efficiency ratio” is defined as noninterest expenses divided by our operating revenue, which is equal to net interest income plus noninterest income. Excluded are material gains and expenses related to merger and acquisition related activities, including divestitures. In our judgment, the adjustments made to operating revenue allow management and investors to better assess our performance in relation to our core operating revenue by removing the volatility associated with certain acquisition related items and other discrete items that are unrelated to our core business.

•

Form: 10-Q

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